More Buying and Selling Ahead

Drivers Among Buyers

• Asset acquisition. Many buyers in today’s market are not simply looking for growth, but rather for a way to replace lost clients and their assets at a faster pace. According to AdvisorBenchmarking’s survey of 655 RIA firms in July 2003, median assets under management (AUM) tumbled nearly 20% between 2000 and 2002. Acquiring another RIA firm’s assets may in some cases be a cheaper alternative for the buyer than increasing assets on its own. Further, our research shows that the typical buying firm is a fairly large one with median AUM of $109 million (the industry’s median is $73 million.) Clearly, larger firms are more likely to have the capital necessary to finance an acquisition, as well as the solid infrastructure to integrate the acquired firm.
• Wealth management expansion. With the wealth management trend marching in full force, more RIA firms are looking to add a slew of new services to their practices. According to the same survey, one out of every five RIA firms was looking to add three new wealth management services to its offerings during 2003. Predictably enough, the wealth management service-specific expertise of the principals at the acquired firm are often the real acquisition targets of the buying firm.
• External buyers. As evidenced by the Harris Bank/SBSB deal, many larger institutions are deepening their reach into the HNW investor market through acquiring well-established and often larger RIA firms. This ilk of buyers could soon become responsible for the majority of large acquisition deals in the RIA marketplace, as the ripple effect typical of M&A transactions (one big deal triggers another) is more prevalent among larger competing institutions.

Drivers Among Sellers

• Cashing out at an attractive price. With buyers far outpacing sellers, as indicated earlier, many principals of RIA firms with solid fundamentals are finding this a good time to exit the business at a fairly attractive price. Needless to say, this exit is typically gradual, as buyers demand that the seller remain in the business for a certain amount of time to ensure a higher percentage of client transition.
• Exiting the business. Not all sellers, however, are leaving the business on a high note. Notwithstanding the last 10 months, the sluggish market performance has hampered the financial health of many firms, especially the smaller and less-established ones with little or no cash reserves. This group of sellers is estimated to make up only a small portion of M&A deals (since they don’t appeal to buyers). However, from a trend-analysis standpoint, it’s important to note that such circumstances typically trigger the need for principals to attempt to sell their firms.

Drivers Among Merging Firms

• Declining financial health. Interestingly enough, many merging firms are looking to join forces as a way to keep their firms afloat. Our research shows that the typical merging firm has median assets of less than $25 million and profit margins of 11.4% (the industry’s median is 24.5%.) These dismal figures reflect the ailing financial health of many such firms, which is often the reason behind their decision to merge.
• Wealth management expansion. However, not all merging firms are in such dismal shape. As with buyers, merging firms often cite the goal of adding new wealth management services as the primary driver behind the merger.

In summary, numerous indicators signal the potential for further growth in M&A activities during 2004. By examining the underlying drivers behind the heightened activities, advisors can determine how they stack up to the rest of the marketplace and formulate their consolidation strategies accordingly. Stay tuned for more analysis on M&A activities in the coming months.

To receive a copy of AdvisorBenchmarking’s 2003 Comprehensive Analysis of the RIA Marketplace study, e-mail Ramy Shaalan at [email protected].

To receive a customized benchmarking analysis report of your practice, visit the free online tool www.AdvisorBenchmarking.com

Ramy Shaalan is Vice President of AdvisorBenchmarking.com, an affiliate of Rydex Global Advisors. He can be reached at [email protected]